Your credit card is probably not something you think about very much. It's very important to understand how credit cards work so you can use them correctly.
Here's what you need to know.
While there are different types of credit cards, they work essentially the same way: The company issuing the card is saying that they will guarantee your payment for whatever purchase your card was used for. For example, if you used your MyCreditCard (fictional name) card to pay for your $10 Burger Bell lunch, Town Bank (fictional name), the bank that issued your MyCreditCard card, is guaranteeing Burger Bell it will get paid the $10. You basically used Town Bank's money to eat your lunch and MyCreditCard made it easier for you to do so.
However, Town Bank has some rules for using its money: Either you must pay for your lunch (and all other purchases made with that card) by the end of the month or else you will have to pay interest on each purchase. If Town Bank has an interest rate of 18 percent, you will pay $11.80 for your Burger Bell lunch.
Town Bank or MyCreditCard may also charge a late fee if they don't receive your regular monthly payment on time. Let's say this month your Burger Bell lunch was the only item on your statement, so you forgot to send in the payment on time. If the late fee on the card is $25, the cost of that lunch is now $36.80 (quite a lot for a burger and fries, isn't it?).
Remember that stores that accept certain credit cards must pay those card companies for the privilege. That's why so many small or new businesses don't accept them -- they can't afford to do so.
As we've seen from the recent financial crisis, banks and card companies are businesses and are out to make a profit. While we don't like interest or annual fees, those are how the card companies make their money. In order to keep money coming in, they often offer new programs and cards and try to persuade you to take part. There's nothing wrong with that, but if you are trying to watch your spending, it is best to be cautious and read all the literature available before accepting a new card.
To manage your funds in the best way possible, keep only one or two major cards. Cancel all the rest (cut up the cards and dispose of them securely to avoid fraud). Use the cards only in a true emergency (that is, for car mishaps, major repairs etc.). Don't use them just because you're too lazy to get to the ATM first. When you get your statement at the end of the month, do your best to pay off the entire balance. If you have a balance, pay off as much of it as possible.
A credit card can be a blessing in a financial crisis. When used sparingly, you can have the money you need without paying your bank extra for the treats you want.
